A disequilibrium mechanism: When managerial decisions cause macroeconomic instability

Abstract

The paper aims to develop our understanding of the processes and mechanisms leading to economic instability. The research design and methods: the paper employs a simple game-theoretic model aimed at depicting why the mechanism connecting nonmaterial motivation of managers and the propensity of economic systems is unstable. The findings are as follows: managers, driven by the nonmaterial value of work, choose strategies that maximize the likelihood of prolonging their employment. Shortsighted CEOs may prefer strategies that offer smooth returns and an unlikely “catastrophic event.” If the unification of strategies occurs, the situation leads to a crisis and recession in the long run. The model put forth in this paper is shown to resemble the mechanism of the 2007-2008 financial crisis.